We are in a period of heavy central bank action with the US Federal Reserve announcement last night as well as the BCB of Brazil and the Bank of England today. We are also in the speeches season for the European Central Bank or ECB. But they have a problem as shown below.
(Reuters) – London-listed shares tracked declines in Asian stock markets on Thursday as the lack of new stimulus measures by the U.S. Federal Reserve left investors disappointed ahead of a Bank of England policy meeting.
Is their main role to have equity markets singing along with Foster The People?
All the other kids with the pumped up kicks
You’d better run, better run, faster than my bullet
All the other kids with the pumped up kicks
You’d better run, better run, outrun my gun
We can continue the theme of central planning for equity markets with this from Governor Kuroda of the Bank of Japan earlier.
BOJ GOV KURODA: ETF PURCHASES ARE NOT TARGETING SPECIFIC STOCK MARKET LEVELS. ( @FinancialJuice )
In fact he has been in full flow.
BOJ’S GOV. KURODA: I DON’T SEE JAPAN’S STOCK MARKET GAINS AS ABNORMAL. ( @FinancialJuice)
I suppose so would I if I owned some 34 Trillion Yen of it. We also have an official denial that he is aiming at specific levels. He might like to want to stop buying when it falls then. Some will have gained but in general the economic impact has been small and there are a whole litany of issues as highlighted by ETFStream.
Koll says the sheer weight of BoJ involvement is off-putting for others who might wish to get involved in the market. “When I go around the world, (the size of the BoJ’s holdings is) the single biggest push back about Japan from asset allocators,” he says. “This is the flow in the market.”
As the Bank of Japan approaches 80% of the ETF market I am sure that readers can see the problem here. In essence is there a market at all now? Or as ETFStream put it.
So how can the BoJ extricate itself from the ETF market without crashing the stock market?
Also it is kind of theme to back the long-running junkie culture theme of mine.
As it stands, the market has become as hooked as any addict.
You also have to laugh at this although there is an element of gallows humour about it.
The recent slackening off in ETF buying might be an attempt to end this cycle of dependency,
That was from February and let me remind you that so much of the media plugged the reduction line. Right into the biggest expansion of the scheme! As an example another 80 billion Yen was bought this morning to prevent a larger fall in the market. It was the fourth such purchase this month.
The US Federal Reserve
It has boxed itself in with its switched to average ( 2% per annum) inflation targeting and Chair Powell got himself in quite a mess last night.
Projections from individual members also indicated that rates could stay anchored near zero through 2023. All but four members indicated they see zero rates through then. This was the first time the committee forecast its outlook for 2023. ( CNBC )
This bit was inevitable as having set such a target he cannot raise interest-rates for quite some time. Of course, we did not expect any increases anyway and this was hardly a surprise.
With inflation running persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer-term inflation expectations remain well anchored at 2 percent. The Committee expects to maintain an accommodative stance of monetary policy until these outcomes are achieved. ( Federal Reserve)
So there is no real change but apparently it is this.
Powell, asked if we will get more forward guidance, says today’s update was ‘powerful’, ‘very strong’, ‘durable’ forward guidance. ( @Newsquawk).
He has boxed himself in. He has set interest-rates as his main measure and he cannot raise them for some time and the evidence is that negative interest-rates do not work. So all he can do is the “masterly inaction” of the apocryphal civil servant Sir Humphrey Applebym or nothing. Quite how that is powerful is anyone’s guess.
Brazil
The same illogic was on display at the Banco Central do Brasil last night.
Taking into account the baseline scenario, the balance of risks, and the broad array of available information, the Copom unanimously decided to maintain the Selic rate at 2.00% p.a.
They have slashed interest-rates to an extraordinary low level for Brazil and seem to think they are at or near the “lower bound” for them.
The Copom believes that the current economic conditions continue to recommend an unusually strong monetary stimulus but it recognizes that, due to prudential and financial stability reasons, the remaining space for monetary policy stimulus, if it exists, should be small.
But telling people that is a triumph?
To provide the monetary stimulus deemed adequate to meet the inflation target, but maintaining the necessary caution for prudential reasons, the Copom considered adequate to use forward guidance as an additional monetary policy tool.
Seeing as nobody is expecting interest-rate increases telling them there will not be any will achieve precisely nothing. Let’s face it how many will even know about it?
ECB
They too are indulging in some open mouth operations.
ECB’s Rehn: Fed’s New Strategy Will Inevitably Have An Impact On The ECB, “We Are Not Operating In A Vacuum”
Regular readers will recall him from back in the day when he was often telling the Greeks to tighten their belts and that things could only get better. Nobody seems to have told poor Ollie about the last decade.
ECB’s Rehn: There Is A Risk That Inflation Will Continue To Remain Too Low Sees Risk That Euro Zone Will Fall In A Trap Of Slow Growth And Low Inflation For A “Long Time”
So we see more ECB policymakers correcting ECB President Christine Lagarde on the issue of the exchange rate. Also as the news filters around there is this.
Three month Euribor fixes at -0.501% … below the ECB’s deposit rate for the first time! ( StephenSpratt)
He is a little confused as of course this has happened before but whilst it is a very minor move we could see another ECB interest-rate cut. It will not do any good but that has not stopped the before has it?
Bank of England
There is this doing the rounds.
LONDON (Reuters) – The Bank of England is expected to signal on Thursday that it is getting ready to pump yet more stimulus into Britain’s economy as it heads for a jump in unemployment and a possible Brexit shock.
Actually nothing has changed and the Bank of England is at what it has called the lower bound for interest-rates ( 0.1%) and is already doing £4.4 billion of bond buying a week.
Still not everybody is seeing hard times.
Former Bank of England (BoE) governor Mark Carney has joined PIMCO’s global advisory board, which is chaired by former Federal Reserve chairman Ben Bernanke.
Carney, who was appointed UN Special Envoy on climate action and finance in December 2019, is one of seven members of the global advisory board, alongside former UK Prime Minister and Chancellor Gordon Brown, and ex-president of the European Central Bank Jean-Claude Trichet. ( investmentweek.co.uk )
As Dobie Gray put it.
I’m in with the in crowd
I go where the in crowd goes
I’m in with the in crowd
And I know what the in crowd knows
Comment
We have arrived at a situation I have long feared and warned about. The central bankers have grandly pulled their policy levers and now are confused it has not worked. Indeed they have pulled them beyond what they previously thought was the maximum as for example the Bank of England which established a 0.5% interest-rate as a “lower bound” now has one of 0.1%. Now they are trying to claim that keeping interest-rates here will work when the evidence is that they are doing damage in more than a few areas. In terms of economics it was described as a “liquidity trap” and they have jumped into it.
Now they think they can escape by promising action on the inflation rates that as a generic they have been unable to raise since the credit crunch. Here there is an element of “be careful which you wish for” as they have put enormous effort into keeping the prices they can raise ( assets such as bonds,equities and houses) out of the inflation measures. So whilst they can cut interest-rates further and frankly the Bank of England and US Federal Reserve are likely to do so in any further downtown they have the problem highlighted by Newt in the film Aliens.
It wont make any difference.
That is why I opened with a discussion of equity purchases as it is more QE that is the only game in town now. Sooner or later we will see more bond purchases from the US Federal Reserve above the present US $80 billion a month. Then the only move left will be to buy equities. At which point we will have a policy which President Trump would set although of course he may or may not be President by them.
Oh and I have missed out one constant which is this sort of thing.
ECB Banking Supervision allows significant banks to temporarily exclude their holdings of banknotes, coins and central bank deposits from leverage ratio calculations until 27 June 2021. This will increase banks’ leverage ratios.
The Precious! The Precious!